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Syndicate
For those who are interested in what economists have to say on the issue though (and I like to think that is the silent majority of lurkers around here), here is a good primer:
http://www.env-econ.net/carbon_tax_vs_capandtrade.html
I'm going to comment on that piece you posted Adam T. But first, you misunderstand how economists have their influence... and you are yourself an expression of that misunderstanding.
That piece on carbon tax and cap and trade you linked to is well written and straightforward. But I would bet the farm that most of ‘ your silent majority of lurkers’ cannot grasp it sufficiently to summarize, answer questions about it and, and formulate questions/criticisms of their own. Not to mention that all of us have to guess/surmise where exactly it fits into the discussion since you do not say.
With some notable exceptions- Jim Stanford coming to mind as one- when economists speak in public they do not explain, they make pronouncements which are backed up by their authority.
Stephen Gordon linked to that same piece in an earlier thread. And he did then the same thing as you did now: “here is your answer folks.”
What stops you from taking a piece that is already quite summarised, verbally tweaking it, and relating it directly to specific arguments that have been made in the discussion?
That is the general expectation on the board, and it should be. You tell people where the particular relevance(s) of the piece lies, and then you refer to the whole text where people can get elaboration.
When one has a body of expert knowledge that other people do not have, you have a better grasp of all the general concepts that come into play. It may require more effort for you to translate those general concepts and principle into the ‘idiom’ of the discussion you are in, as compared to using the shorthand shop talk of your discipline- but you can do it, and you can do it easier than the people you are talking with... because of that foundation in the general concepts.
What right do you have to simply tell people that they are ‘incorrect’? Or that you already gave them “their” answer and they are just rejecting it because they don’t like it ?
Is it any wonder that this leads to anti-intellectual mud-slinging?
[And by the way, some of it you see here is not just from ‘prompts’ in this thread... it is from past iterations on other subjects.]
All professional and credentialed intellectuals- at least all those in the academy- are prone to oblivious use of shop talk and jargon regardless of the fact they have an excellent grasp of the general concepts and could discuss without the crutches. The bulk of them don’t care and/or are smugly content.
It would seem that economists as a group are so particularly used to having the public in general and individuals/groups in everyday life bow down before their authority that as compared to other disciplines it renders them clueless as to their awareness of their role in a discussion.
Depending on the weight of one's own or one's disciplines authority is also anti-intellectual... even if it isn't intentional.
Let alone what we would call someone like Gordon who thrives on goading people and wrestling in the mud.
[ 27 June 2008: Message edited by: KenS ]
The model on the carbon tax deals with the choice between paying the tax or abating emissions.
But there is a third choice: passing on the tax.
In this case we are talking about a tax that comes in at the production level at the same time for everyone, with lots of advance signalling about the amount and date, lots of time for competing firms to signal each other, lots of time for firms to signal their buyers.
So guess what is going to happen?
Assuming for the purposes of simplicity that all the tax costs are passed on. This produces an internal cost saving / profit opportunity. In dollar terms, the firm still has the same incentive for abatement as when they had to simply absorb the cost of the tax.
But firms are full of such latent cost saving profit opportunities. The monetarised costs and benefits are only part of the calculus: only a percentage of those with favouable cost/benefit get done, snd there are lots of compelling organizational behaviour reasons for that.
In the first place, neither in that model in the link or anywhere in these thread discussions has there been answer to the obvious quections: how high a carbon price would it take to reach the aggregate emission reductions we require.
Of course there cannot be a definite answer to that. But we go based on what we know. And based on that, can we expect that there is carbon tax level that it is feasible to reach [viz economic effects and political process that has to continuously support raising the tax], that will start making sufficient aggregate reductions?
Part of the answer to that is looking at the time frame of the plans being proposed. With the incentive levels being put into place, and considering that a great deal of this manifests internally in a more diffuse and uncertain manner than do a firm's external costs, what is the range of expectations in emission reductions during the 5 year time frame of the plan?
And is that sufficeint for getting us started towards the aggregate reductions?
And compare that to the hard caps of a cap and trade system. Similarly, we cannot simply assume that the hard caps will be the resulting emissions. We can't know what the results will be. But based on what we do know, what is the range of expectations.... and how does that compare to what can be expected of carbon tax induced reductions?
One of the virtues of the carbon tax is that it is the means to effect the behaviour of individuals and 'small emitters' that are never going to be directly effected by a cap and trade system.
The overall virtue is that it is argued to also be at least good enough for effecting the large emitters, making it the best single plan. I'll set aside arguing with that.
That it effects individuals is pretty much unquestionable. But the translation to sufficient emission reductions is another matter, and the efficiency of pricing push compared to emission results is more dubious than it is with large emitters.
We do know that a pricing push plus readily available alternatives produces the best results.
IE, growing mass transit, revolving loan funds with payback geared to cost savings from the purchased equipment. IE, geen initiatives.
Green initiatives that take major spending. And what is the probability we would get that from the Liberals when they have staked everything politically on their tax cuts?
Viz consumers, why bother with the carbon tax at all? The biggies consumers can effect are predominately in energy use and conservation. The market based gouging is and will be giving them far more incentive than will the proposed carbon taxes.
They have the incentives already. Now they need the tools, not more incentives.
[ 27 June 2008: Message edited by: KenS ]
It is not economics - have studied it thanks. I do have bit of an idea of what is going on, but thanks for the sanctimonious outburst.
It is how Economists, for the most part, impart divine wisdom as if it was an exact science with immutable laws. It isn't and it doesn't have them. At best it is a device for educated guesses and often those guesses are horribly wrong. Economics is a kind of religion for many, with the same divine hand, only they call it the free market, shaping our world. Hint there is no such thing as a true free market in the real world. Not even in a Chicago school.
[ 27 June 2008: Message edited by: Bookish Agrarian ]
But, with caps we have a better idea of what the results will be than we do with the tax crap shoot method.
We know how much GHG any given amount of any carbon compound has the potential to create when used in various ways. From that we can limit the amount of use of the compound to a level that will not allow for the amount of GHG created to go beyond whatever target we set. The principle is simple, enforcing it effectively may take some real fortitude.
We must keep in mind that the GHG issue is not the real problem, only one symptom of that problem, as declining fish stocks, vanishing forests, and so on are also symptoms.
The core problem is that we have over grown our ability to sustainably support our system. The only real cure for that is to reverse growth and start reducing our demands on the environment. This is a huge political problem since the fairy tale of ever increasing prosperity through growth is deeply embedded in our economic/political thinking, even though it is a fallacy.
The market and market forces are a very inappropriate method to use as the primary tool to fix our problem. They are, in fact, part of what has caused the problem in the first place.
The economist's role in fixing our environment should be in finding ways to mitigate the effects of reversing growth so that the pain is more evenly spread amongst the classes.
True. But nobody wants to talk about that. I was at a Green Party meeting a while back when someone mentioned that it is time we talk about an end to growth as a political and economic imperative. You would have thought someone had lit rip a long, loud, and smelly fart by the response.
Even while the voices of scientists become more shrill in and direct in their warnings, the wall of denial is erected ever higher.
Yes, I realize that post was pure theory and did not comment on the specifics of the actual situation, that is why I called it a 'primer'.
In regards to your question as to why I did not comment on the actual specifics, I did that in the prior thread but received no replies, I gathered that was so in part because people didn't fully understand it.
Now that you have read the primer, I gather that post will make more sense. So, I repost it:
You:
"You make the same mistake as Stephen Gordon of treating all firm costs the same. A tax cost is internalized in a manner close enough to what is predicted from these simple abstract models. But abatement costs are investments firms make. No investment cost is internalized anything like ‘exactly the same way’ as inputs like fuel costs and taxes. And the nature and cost of these investment costs also have additional variables attendent to the prominent role R&D plays, and its shared development among firms.
But in the final analysis, we’re not going to resolve how much, when, and with what mediating opportunities, cap and trade actual emission abatement costs are passed on to consumers. We know the carbon tax costs will be essentially transferred immediately to consumers. It is expected to happen even in industries with intense competitive pressures where firms cannot always quickly pass on their increased production costs. But because the carbon tax hits them all at the same time, they can pass it on with confidence. Against that certainty, the degree and timing of the passing of cap and trade abatement costs is unknown."
Me:
I'll admit my sole expertise on this issue is that I took a course in environmental economics and I don't know much about the specifics regarding carbon pollution.
There are a few obvious points though
1.Preventing some carbon pollution may not take any R&D. There may be products now, like scrubbers, that can capture or block it, or firms may be able to cheaply change some aspects of their production to reduce the amount of carbon they emit. Because, to this point, there has been no price on carbon, they've had no reason to do any of these things. With the pricing of carbon, they will do what I said above, they will apply the equimarginal principle and abate to the point to where the marginal cost of abating equals the cost of the tax.
Given that there has been a tax on carbon in many European countries for quite some time, it would not surprise me if off the shelf products did exist, although, as I said above I don't actually know for sure.
2.You are almost certainly correct that firms do consider variable expenses like R&D costs differently than marginal expenses like taxes. However, it is the tax that is the important marginal expense and reducing that expense that a firm would consider as the expense side of the equimarginal equation. As I've said before in this discussion, if you think a firm just thinks it can 'pass a cost on' go and ask your employer for a $1,000,000 a year salary and tell them "it won't cost you anything, you can just pass it on to the consumer."
Your point that since all the companies will be facing the same tax, they'll all respond the same way fails by the same test. All the companies are in different situations and because of that, those that can abate the quickest so as not to pass the cost on, will have a competitive advantage. It's that competitive advantage that creates one of the pressures for firms to figure out how to abate.
The other is on the demand side. Every firm knows that if they simply raise their price, the demand will drop, even if they all raise the price. That is the basic theory of supply and demand. To be sure, how much demand would drop depends on the price elasticity of the good, but it is the main reason why firms try not to simply pass their costs on. So, even for a firm in a monopoly position, of which there may be several in the case of carbon emissions, it still makes sense for them to apply the equimarginal principle and abate to the point where the marginal cost of abating equals the price of the tax.
50 years ago you might have been right that the senior manager of a large firm with a high school education would have said "I'll just pass the cost on" but these days, all the managers have M.B.As and they all know of the equimarginal principle concept, and they all know that if they don't apply it, their competitors will.
You:
"We know the carbon tax costs will be essentially transferred immediately to consumers. It is expected to happen even in industries with intense competitive pressures where firms cannot always quickly pass on their increased production costs. But because the carbon tax hits them all at the same time, they can pass it on with confidence."
Me:
Who knows this and how do they know it?
Could you please post some newspaper or journal articles that agree with this? You've basically done what you accuse Stephen of doing: posting an assertion without any evidence to back it up. Of course, Stephen at least does have work from economics researchers to back up his assertions, I don't know what expertise you are citing to give your claims any validity.
For instance, as I said above it also creates a competitive advantage for companies, those that can abate the quickest and reduce their taxes can raise their prices the least. I can cite examples in my environmental economics textbook that this occured with other pollution that either had a tax added to it or became subject to a cap and trade system.
Yes, I don't disagree with any of that. As I think I said earlier, my preference is for a cap and trade on industrial polluters and a tax on consumers.
There are a few points:
1.You are correct that cap and trade isn't fullproof. Raising costs on domestic producers (as cap and trade would do if it is only a domestic system) could merely induce people in Canada to buy from foreign producers. (I realize this wouldn't happen with energy production, which is a big part of carbon production)
2.As Stephen has pointed out many times, there is a cost on producers with cap and trade as with taxes. As cap and trade is less direct though, the political parties can deny it (as Stephen alleges the N.D.P is doing). This hits the poorest the hardest if there aren't credits to them in return.
3.It is well established I think even among those who don't like economists and economics that prices are more elastic in the longer term. As we're starting to see, where as gas consumption in the United States was virtually unchanged initially after prices started to rise (completely inelastic), people are now starting to alter their behaviour (buying smaller cars, car pooling, driving less, even moving closer to work). To be sure, the economic situation in the U.S is also a factor of this, but then, the rising gas price is a factor in the economic situation. So, a carbon tax, especially one that starts out small isn't going to have much immediate impact, but it will have more and more impact as time goes by. (and these changes have already started due to higher gas prices).
And as I pointed out already about vehicle use: Rubin is talking about 10-15% less miles driven 5 years from now. Others are predicting less. Even if it is that much it is after a projected tripling of gas prices, vehicle prices up 40%, and a financial crisis.
Reductions in the order of 10-15% over those 10 years [from when fuel prices started rising to 2012 projection] is what we need- just to get started.
What are the implications of relying on carbon pricing if it took a giant sledgehammer like that [the equivalent of a several hundred dollar carbon tax] to get a modest movement in one sector.... and at that, a sector where over 50% of households transportation is their single biggest expense so they literally do not have room to simply absorb more than a doubling of their largest expense.
I may be prejudiced, but I'm not impressed by you saying yours are more in conformity with what more economists think.
I don't expect mine to be accepted on the face of it either.
Where is some kind of macroeconomic evidence- not just some case studies- or something else equally convincing that we can see the beginnings of agrregate reductions from a primary reliance on carbon pricing without the huge and politically if not economically unlikely price hikes.
Gotta say that I'm pretty comfortable about this allegation. In addition to the 'reality check' page I linked to earlier, the NDP's talking point after Dion floated the carbon tax was that it would hurt low-income consumers (example, example).
The people who are handling the climate change file for the NDP are either hypocrites or idiots. And after hashing this out for the last few weeks on babble, I'm not prepared to rule out the possibility that they are hypocritical idiots.
Well, that is the prediction from one person, I obviously have no idea. However, if that is correct, I would just remind you there are 3 components to carbon pollution from automobiles (the number of cars on the road, the amount they drive and the pollution released from the cars).
It would be expected that while miles driven may only decline 15%, many of these miles will be driven in smaller cars, resulting in a greater than 15% reduction in the amount of carbon emissions.
Well, I've misplaced my textbook atm :|
1.I don't think the textbook mentioned other specific examples of carbon reductions, however it did mention real world cases of reductions of other pollutions through either cap and trade systems or taxes. Most of these occured in Europe.
I'll try and find my textbook, otherwise I suggest you go back to that website I linked to earlier and look around some of the 'top 10 blogs' that are listed on that site.
Gaaah!
The whole point of carbon pricing is that it does show up as price hikes for the consumer. Consumers respond to the increase in prices by reducing their demand. Because demand curves slope down.
But the further up the supply chain you go the more likely that each point of exchange will sharpen their pencils and absorb more of the costs.
Golden Age of Refining Margins to End
Moreover the easiest way to pass a customer is an enduser tax. There would be far less sympathy for an oil giant (at the production stage)passing on a tax while still enjoying windfall margins.This is not to pretend that the bulk of the cost isn't going to show up at the end user, just that there are many possiblities for the amount to shrink.
As far as just giving money to the poor. Yesterday I got $400 in the mail from Gordon Campbell. First I had to fight with my kids who had interpretted $100 for every man, woman and child as meaning that $200 of this was their play money. Secondly, the money is not at all connected to carbon reduction. We don't want to just pay for carbon usage of low income groups we want to reduce their dependance on carbon. Often this choice is cheaper in the long run but demands a significant capital expenditure at the front end. That is where the money should go.
Your are correct, but this goes against the right-wing dictum that all taxes should be transparent to the consumer, i.e. end user taxes, which is itself an idea meant to stir up popular support against taxes and runs counter to efficiency from a collection standpoint and allows businesses to maintain higher returns while blaming costs on taxes that the public can easily see.
Taxes at source of extraction or importation would be more efficient to collect, and may or may not be passed on completely to the consumer depending on how competitive the market is.
It would be more effective just to limit the supply of carbon to whatever level we determined rather than waste time fooling around with price finagling and tax schemes that amount to little more than wishful thinking when it comes to meeting any hard targets.
We don't need consumers to reduce their demand, we need their demand to be unattainable above a certain level regardless of cost.
Please pretend you hadn't read this and continue the useless debate over caps or taxes.
Do you deliberately misread? And if you do, that is misrepresentation.
My questions [with emphasis answered] to which you were ostensibly answering:
To which you responded, "Consumers respond to the increase in prices by reducing their demand."
Well, duh. But the questions were how much, and can we expect it will be in the range of what is sufficient.
Adding that qualifier is like asking for evidence that a nasty-tasting medicine works if instead of swallowing it, the patient throws it in the garbage.
[ 27 June 2008: Message edited by: Stephen Gordon ]
It's always profitable to do this; it'd happen regardless of whether or not there was an emission policy in effect.
This is at least an internally-consistent viewpoint. But it's not one the NDP shares.
Not officially, yet.
OK. How much? What range of price increases will it take to get the reductions we require?
Gordon: Price goes up demand goes down.
You can't answer that? Why the hell not?
The basic premise of what he says is true: Price goes up demand goes down.
The question isn't even how much will a product increase in price. The question really is how much are you prepared to pay for it? When does the cost prompt you stop buying it?
If it is gas per liter: $1.50? $2.00? $3.00? $4.00? More? Because that is the price you will bear.
So, if you just set a cost on emissions at a set price, what is that based on? What is the reaction to that action in any given market segment? What will it do to the cost of coal? And is that just coal consumed in Canada, or would the cost of products be calculated to include the cost of emissions for products made in China or elsewhere? If not, isn't that a levy on domestic products?
Surely if you can demand from Stephen Gordon he quantify "How much? What range of price increases will it take to get the reductions we require?" you can answer the same questions yourself?
This is no doubt true.
You may be thinking of the example of the long lasting lightbulbs that have been developed recently (and that use some mercury), apparently industry is very slow to adopt them.
Economists are aware of this, and like everything else have a name for it, I believe it is called the 'adoption problem.'
In short, this is due to companies having doubts that the payoff in return to the higher upfront costs will be realized.
In the case of firms abating their carbon usage rather than paying the cost, this would likely not be the case.
Firms choose to invest depending on their rate of return. You are correct that there are many more projects they could engage in that what they actually do.
But (and to be sure this is a theoretical example), the payback in terms of abating could be huge. If it costs $50 per tonne of carbon, and the price to abate the first say 1000 tonnes is $10 per tonne, that would be a 400% payoff. (50-10)/10 * 100%. You aren't going to tell me that a firm isn't going to take up on that.
Even if they still 'pass the tax on' rather than not raising prices (and their are incentives both ways), that would still be an enormous incentive to abate.
Clearly what we lack in regards to moving this discussion forward is a knowledge base. Which is, what technologies are available now off the shelf for firms to abate carbon?
As I said, I don't know, but as I also said, that Europe has had carbon taxes/cap and trade for a number of years, it would certainly not be surprising for many technologies to have been developed.
It's not a question for you- for whom all the plans suck equally. "A pox on all your plans." But if it could be demonstrated that a $300/tonne carbon tax would lower our emissions sufficiently, you'd say lets do it now. But probably not, since it's a market based system.
If its going to take a tripling of the cost of vehicle fuel to get the kind of reductions in usage we need in every sector of the economy- then maybe we need to look at something other than a carbon tax.
The market price increase is projected to be far more than the proposed carbon tax. We've already had just in the last few months more price increase than the carbon tax will bring in 5 years. So the incentive to change behaviour is already there.
When it comes to individuals [smaller businesses as well] the other side of the dynamic is how available to people is the means to reduce their energy usage. So what are we doing focusing on a carbon tax- the incentive side of the change dynamic- when the much bigger deficiency is in making sure people have the means to substantially reduce their energy usage?
If the Dion plan is all about carbon pricing, then it is a central question: what is the evidence that a reliance on pricing is going to get the level of emission reductions we require.
The projections of how much distance driven will drop is some such evidence. But given the level of carbon pricing being talked about to get those reductions, this raises more questions.
If it takes a price increase equivalent to what you would get from a $500/tonne carbon tax to get the reductions from individuals that we need, then maybe we need to be looking at something else as our primary tool.
It is actually a general argument for emphasising regulation over relying on price pushing to reduce demand.
In the US they had the process of coming up with the next round of regulations for fuel economy in the auto industry. The Big Three resisted the standards being pushed- even by the Bush administration. And they howled when the general standard was agreed on a year ago, but in the ensuing months they started talking about the changes they would make to meet the standards.
Within a few months, the more rapid escalation of fuel costs and how much consumers are taking that to heart, has trumped the timeline for those regulated increases in fuel economy... and for years ahead.
All the Big Three, and even the much better positioned Asian car makers, are scrambling to meet the changed demand picture much faster then what the new standards require of them.
If we had cap and trade already, a similar thing would be happening to industrial emitters. Fuel usage [and soon, steeper power rate increases working their way through] might very well generally push towards changes greater than what the hard caps require.
IF that happens, great.
But we cannot know in advance whether fossil fuel prices will continue the current trends. We have to choose policy that does the best job for all the possible scenarios.
If fuel costs do not keep up the current rate of increases then hard caps are in order to make sure emitters make the reductions we require. Relying on a carbon tax has more uncertainties than does relying on the hard caps in cap and trade.
If fuel costs keep up the pace the many pessimists expect- then those market prices alone may well do more than the slower moving hard caps. But in that scenario, the comparatively trifling amounts of the carbon tax will also be irrelevant to effecting behaviour changes... they'll just be another stick in the fire of dealing with economic dislocations to individuals and businesses.
[ 28 June 2008: Message edited by: KenS ]
Here's how to find out:
- Decide by how much you want to reduce quantities.
- Find estimates for the elasticities of demand for various goods.
- Divide the first number by the second.
If, for example, the short-run elasticity if demand for natural gas is 0.1, and if you want to reduce demand by 10%, then you need a 100% price increase to do it (100 * 0.1 = 10).
For most goods, the long-run elasticity is larger. If the long-run elasticity is 0.5, then the prices will eventually come down to levels that are 20% higher than what they are now.
We don't really have very precise estimates for all the elasticities that will come into play here, but this gives you an idea of the scale of the problem.
Clearly, the carbon taxes on the table will be have nowhere near this sort of effect on quantities. But that also means that a program that has a stronger effect on emission levels will have much stronger effects on prices.
Get off your high horse KenS. You are incredibly full of shit. Prove that your plan will reduce emissions or that it will even matter?
Of course you can't because it isn't about emissions and it isn't even about policy it is about some silly egotistical contest you're having with Stephen Gordon.
The fact is, in this case, he is absolutely right. Increasing prices reduces demand.
The question that remains is will it reduce emissions or will it merely shift them some where else?
For example, the NDP plan places a cost on only Canadian industrial emitters. So why not move production to the US or China?
Already pipelines are in the works to move tar sands production to the US. That might help keep a lid on Canadian emissions but the atmosphere doesn't recognize national borders.
Does this post warrant two long pages of dense, gray text? I really hope so.
[ 28 June 2008: Message edited by: Frustrated Mess ]
Nobody can prove anything on this. Its a case of what looks best, what has the most risk of not working, etc. Throw it all in the hopper and we all makes our choices.
As tthe moving offshore possibilities- thats a real issue no matter whether you go for pure regulation with hard caps, cap and trade with hard caps, or a carbon tax. There are soultions. None of them certainties of course... but the plans being discussed here have the same issues.
And for the record, I'm fine with getting information form Stephen Gordon. The last post is a nice change, and I'll look the material over.